Six Former Senior Executives of Xerox Settle SEC Enforcement Action Charging Them With Fraud; Executives Agree to Pay Over $22 Million in Penalties, Disgorgement and Interest
FOR IMMEDIATE RELEASE
Executives Agree to Pay Over $22 Million in Penalties, Disgorgement and Interest
Washington, D.C., June 5, 2003 — The Securities and Exchange Commission today charged six former senior executives of Xerox Corporation, including its former chief executive officers, Paul A. Allaire and G. Richard Thoman, and its former chief financial officer, Barry D. Romeril, with securities fraud and aiding and abetting Xerox's violations of the reporting, books and records and internal control provisions of the federal securities laws.
The six defendants have agreed to pay over $22 million in penalties, disgorgement and interest without admitting or denying the SEC's allegations. The SEC intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the alleged fraud.
The SEC's complaint alleges that the executives engaged in a fraudulent scheme that lasted from 1997 to 2000 that misled investors about Xerox's earnings to polish its reputation on Wall Street and to boost the company's stock price. The scheme involved the use of accounting devices that were not disclosed to investors, many of which violated generally accepted accounting principles (GAAP). The complaint alleges that the defendants' fraudulent conduct was responsible for accelerating the recognition of equipment revenues by approximately $3 billion and increasing pre-tax earnings by approximately $1.4 billion in Xerox's 1997-2000 financial results.
"A public company's stock price should reflect economic reality, not a distortion of that reality," said Stephen M. Cutler, the SEC's Director of Enforcement. "As alleged in the complaint, Xerox's senior management substituted accounting devices for the company's true operational performance. The investing public pays an enormous price for such fraudulent conduct."
"Manipulation of revenue and earnings through accounting devices has no place in the executive suite," said Paul R. Berger, Associate Director of Enforcement. "The executive suite should be reserved for those who will tell the investing public the truth about the company's performance. That didn't happen here and Xerox's shareholders were deceived."
The complaint names the following individuals as defendants who held senior positions at Xerox during 1997 through the publication of Xerox's 2000 financial statements:
- Paul A. Allaire, former CEO of the company until April 1999 and again from May 2000 through Aug. 2001, and also the former Chairman of Xerox's Board of Directors and a Director throughout the period charged in the complaint;
- G. Richard Thoman, former President and Chief Operating Officer from July 1997 through April 1999, CEO from April 1999 through May 2000, and also a Director of the company from July 1997 through May 2000;
- Barry D. Romeril, former CFO from 1993 through December 2001, and executive vice president from 1997 through early 1999 and then Vice Chairman;
- Philip D. Fishbach, former Controller until his retirement from Xerox in April 2000;
- Daniel S. Marchibroda, former Assistant Controller until January 2000; and
- Gregory B. Tayler, former Director of Accounting Policy (March 1997-April 1999), Assistant Treasurer (May 1999-March 2000) and Controller (April 2000-November 2001).
The SEC's Federal Court Complaint
The SEC's complaint, filed in U.S. District Court for the Southern District of New York, alleges that the defendants relied on what Xerox internally called "one-time actions," "one-offs," "accounting opportunities" and "non-operational actions" to impose accounting adjustments on operational results for the purpose of increasing equipment revenues and inflating earnings in financial results Xerox reported to the public. These accounting actions, which were not disclosed to investors, were used at the end of each financial reporting period during 1997 - 2000 to "close the gap" between Xerox's actual underlying earnings and its internal targets and those of Wall Street analysts. The accounting devices improved Xerox's earnings, equipment revenues and margins in each quarter and year during 1997 - 2000, and allowed Xerox to meet or exceed Wall Street expectations in nearly every reporting period during 1997 - 1999. By 1998, nearly three out of every ten dollars of Xerox's annual reported pre-tax earnings and up to 37 percent of its reported quarterly pre-tax earnings came from undisclosed changes to its historic accounting practices and estimates.
The complaint alleges that CEOs Allaire and Thoman, and CFO Romeril, set a "tone at the top" of the company, which equated business success with meeting short-term earnings targets. Romeril directed or allowed lower ranking defendants in Xerox's financial department to make accounting adjustments to results reported from operating divisions to accelerate revenues and increase earnings. Fishbach, Marchibroda and Tayler adopted and applied the accounting devices for the purpose of meeting earnings goals and predictions of outside securities analysts. Allaire and Thoman then announced these results to the public through meetings with analysts and in communications to shareholders, celebrating that Xerox was enjoying substantially greater earnings growth than true operating results warranted.
The complaint alleges that the defendants used undisclosed accounting devices to "close the gap" between underlying and desired financial results, and that the defendants were aware of Xerox's increasing dependence on such accounting actions during 1997-2000 through various internal Xerox reports, memos, e-mails and meetings that addressed the financial performance of Xerox's significant operating units and the company's overall consolidated financial results. For example, the complaint alleges:
- in a September 1997 e-mail copied to Fishbach, Marchibroda and Tayler, Romeril asked the controller of Xerox Europe about his progress in assessing a potential accounting device and stated: "This could be the crucial opportunity for making Quarter 3. I cannot see a higher priority in terms of once-offs."
- in November 1998, Romeril informed Allaire, Thoman, Fishbach and others that over the past four years Xerox's major earnings-generating market in Brazil had "$700M of unreal profits" from "non-marketing actions" and that the "[c]onceptual framework [of] our profile is illusory . . . the profits are there the question is the timing of when you take them";
- in August 1998, Fishbach told Thoman that although Xerox Europe's "operational" growth was 2 percent, "the growth that is likely to be reported is closer to 10% given headquarters adjustments for margin normalization and other accounting items";
- in October 1999, Xerox's vice chairman reported to Romeril and Thoman that Xerox Europe's underlying operational results, without accounting devices and restructuring, "have been deteriorating since 1995 and are very different than the reported results," and he provided them a chart from Xerox Europe's president illustrating operational results with and without the use of accounting devices;
- likewise in January 2000, the president of Xerox Europe informed Thoman, Romeril and others that Europe's pre-tax profits had been "declining since 1996," that declines in 1999 profits were "driven by prior year once-offs [including accounting devices], the benefits of which started to reverse during 1999," but that "this declining trend has been fully contained in the reported profit" in part through the use of such accounting devices.
- in November 1999, Romeril told Thoman and other Xerox executives that when accounting actions and certain other items were stripped away from Xerox's overall consolidated reported revenues, Xerox was essentially a "no growth" company from 1998-1999, and in that same month Romeril provided Thoman, Fishbach, and others with documents showing the historical impact of accounting actions and certain other items in order to show the company's "true operating economics."
Specifically, the complaint alleges that all of the defendants fraudulently failed to disclose to shareholders and investors the financial impact of the principal accounting devices Xerox used during 1997-2000. These devices accelerated the recognition of equipment revenue and increased earnings from leases of Xerox copiers that historically were recorded in future periods, and allowed Xerox to portray its business and growth as far more robust in 1997-99 than they in fact were. The complaint further alleges that defendants Romeril, Fishbach, Marchibroda and Tayler, Xerox's senior financial executives, knew or were reckless in not knowing that these accounting devices violated GAAP and should have been disclosed under GAAP. In addition, as alleged in the complaint, Romeril, Fishbach and Marchibroda knowingly or recklessly used excess or cushion reserves and income from tax refunds to manage earnings in violation of GAAP, and Tayler was aware of the improper use of the largest of these reserves. Finally, the complaint alleges that all of the defendants used undisclosed business transactions in 1999 to accelerate the recognition of equipment revenue and earnings that concealed financial and operating weaknesses.
The defendants have each offered to settle by consenting, without admitting or denying the SEC's allegations, to the entry of a final judgment in the civil action that:
- permanently enjoins each of them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, and (except for Allaire and Thoman) violating Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder;
- imposes an officer and director bar against Allaire (5 years), Thoman (3 years) Romeril (permanent), and Fishbach (5 years);
- requires each of them to pay civil penalties in the following amounts: $1 million for Allaire; $750,000 for Thoman; $1 million for Romeril; $100,000 for Fishbach; $75,000 for Marchibroda; and $75,000 for Tayler;
- requires each of them to pay disgorgement and prejudgment interest thereon in the following amounts:
|Allaire: ||$5,696,678 - disgorgement;||1,938,124 - prejudgment interest;|
|Thoman:||$4,668,396 - disgorgement;||$1,440,993 - prejudgment interest;|
|Romeril:||$2,987,282 - disgorgement;||$1,227,688 - prejudgment interest;|
|Fishbach: ||$666,748 - disgorgement;||$289,904 - prejudgment interest;|
|Marchibroda:||$273,399 - disgorgement;||$88,920 - prejudgment interest;|
|Tayler:||$92,603 - disgorgement;||$32,397 - prejudgment interest; and;|
- requires Fishbach and Marchibroda to relinquish their respective rights to certain deferred bonuses ($127,035 for Fishbach and $50,228 for Marchibroda) plus accrued interest on these amounts.
In addition, both Romeril and Tayler have agreed to the entry by the SEC of an Order pursuant to Rule 102(e) of the SEC's Rules of Practice that suspends each of them (based on the entry of the injunction in the federal court action) from appearing or practicing before the SEC as an accountant. This Order will suspend Romeril permanently and suspend Tayler for three years with a right to apply for reinstatement after the three-year period.
Prior SEC Action
The SEC previously brought two other injunctive actions based on the same fraudulent scheme as is alleged against the senior Xerox executives, as well as other allegations. On April 11, 2002, the SEC brought an injunctive action against Xerox. Without admitting or denying the allegations of the complaint, Xerox consented to the entry of a Final Judgment that permanently enjoined the company from violating the antifraud, reporting and record keeping provisions of the federal securities laws. Xerox also paid a $10 million civil penalty, agreed to restate its financial statements and agreed to hire a consultant to review the company's internal accounting controls and policies. Securities and Exchange Commission v. Xerox Corporation, Civil Action No. 02-CV-2780 (DLC) (S.D.N.Y.) (April 11, 2002). See Litigation Release No. 17465 / April 11, 2002/Accounting and Auditing Enforcement Release No. 1542 / April 11, 2002. In addition, on January 29, 2003, the SEC brought an injunctive action against Xerox's former auditor, KPMG LLP, and four of its audit partners in connection with the audits of Xerox from 1997 - 2000. The action against KPMG and its partners is currently in litigation. Securities and Exchange Commission v. KPMG LLP, Joseph T. Boyle, Michael A. Conway, Anthony P. Dolanski and Ronald A. Safran, Civil Action No. 03 CV 0671 (DLC) (S.D.N.Y.) (January 29, 2003). See Litigation Release No. 17954 / January 29, 2003 / Accounting and Auditing Enforcement Release No. 1709 / January 29, 2003.
The SEC's complaint will be posted on the SEC's web site as soon as possible at www.sec.gov.
For further information contact:
See Also: SEC v. Xerox Corporation; SEC v. KPMG LLP, et al.
- Paul R. Berger, Associate Director, Division of Enforcement - (202) 942-4854
- Timothy N. England, Assistant Director, Division of Enforcement - (202) 942-7109